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Understanding Homeowners Insurance

Homeowners insurance is a financial protection policy that pays a lump sum if your house is damaged or destroyed by fire, weather, theft or other disasters.

Most homeowners who have a mortgage are required by their lender to buy homeowners insurance. But there are different types of home insurance with various types of coverage. Understanding exactly what is and isn’t covered, and the coverage amounts for the policy’s different components, is crucial before deciding on a policy.

Here’s an overview of the basics of homeowners insurance for single-family houses. Note that apartment insurance, or condo insurance, has some key differences that we’ll cover below.

Components of Homeowners Insurance

Homeowners policies really consist of four different coverage types:

• The property itself
• The contents of the house — your personal belongings
• Legal liability to protect against accidents incurred by others at your house
• Loss of use, to pay for temporary housing while your house gets repaired

Types of Coverage

While all policies offer coverage in these four categories, there’s more to know about what is covered and under what circumstances. To understand what kinds of events will trigger a payout on your home insurance, you first need to understand the two basic types of homeowners insurance:

• Named perils: Covers only the types of disasters named in the policy
• Open perils: Covers all disasters except exclusions specifically named in the policy

The most common perils usually covered by homeowners insurance are:

• Fire
• Windstorm
• Hail
• Lightning
• Smoke
• Explosion
• Theft or vandalism
• Riot
• Vehicle collision

A named perils policy will cover these, while an open perils policy will cover these plus any peril not specifically named as an exclusion. There are also different levels of named perils policies. A basic policy will cover only the conditions listed above, whereas a broader named perils policy will also add:

• Freezing of plumbing
• Accidental water damage
• Falling objects
• Weight of snow or ice

The most common named exclusions that no homeowners insurance will cover are:

• Earthquakes
• Flood
• Power failure
• War
• Nuclear Explosion
• Neglect
• Ordinance of law
• Intentional acts

To protect against earthquake and flood, you’ll need to buy flood insurance or earthquake insurance separately. The price of earthquake or flood insurance varies widely depending on whether your home is located in a high-risk or low-risk area.

If you own an apartment or condo, you’ll need a separate class of homeowners insurance (H06). Condo insurance, or apartment insurance, protects the contents of your home and the ceiling floors, and walls from certain types of damage. However damage to the apartment building itself is covered by a different policy held by the building association.

Homeowners Insurance Costs

Homeowners insurance costs vary by state. No matter where you live, the easiest way to lower your homeowners insurance rate is to choose a policy with a higher deductible. The higher your deductible in the event of a claim, the lower your monthly premiums will be.

However there are are a few discounts available to make homeowners insurance cheaper. If you qualify for any of them, make sure to ask your insurer when getting a quote. Many home insurance companies offer discounts for:

• First-time homeowners
• Added security measures
• Non-smokers
• Couples